Ten Fatal Mistakes Business Owners Make: No. 4 – Unqualified Statutory Agent

If you are like most business owners, you spent less time choosing your statutory agent than you did choosing the type of pens you would order. Though the decision may seem mundane, choosing the wrong statutory agent can create headaches for your company.

A corporation or limited liability company is treated as a “person” under the law. Because a corporation can only act through humans, however, the law requires that the company identify a person who is authorized to accept service of process and other important legal notices. That person is known as your statutory or registered agent.

Like most states, Arizona law allows the company to designate any person as its statutory agent. Many business owners think that they will save a few dollars by acting as their own statutory agent. The fact that you can serve as your company’s statutory agent does not mean that you should serve in that capacity.

True Story: A contractor client of mine was stunned when he learned that his bank accounts had been frozen. The bank told him that a judgment had been entered against his company, and the accounts were frozen in response to a garnishment served on the bank. When he came to see me, my client was in a panic as he had written checks that would be returned because the account was frozen.

Further investigation revealed that the judgment was based on the company’s failure to answer a garnishment. The company’s receptionist, Alice, had failed to pay one of her creditors. The creditor sued Alice, and was awarded a judgment against her. When Alice failed to pay the judgment, the creditor served her employer with a garnishment complaint seeking to garnish her wages.

The owner had named himself the statutory agent of the company. When the process server came to the office, he met Alice, who took the garnishment papers, decided that she did not want her wages garnished, and hid the paperwork. Several weeks later, the creditor notified the company that if it did not answer the garnishment, the creditor would ask the court to make the company responsible for Alice’s debt. Alice again intercepted and discarded the paperwork. The creditor – who was displeased when the company failed to respond – asked the court to make the company responsible for Alice’s debt, and, because the company failed to answer the garnishment, the judge obliged.

We were able to set aside the judgment against the company, but my client spent several sleepless nights worrying while we undid Alice’s handiwork. It was an expensive lesson.

Choosing a Qualified Statutory Agent: Avoid needless headaches by choosing a qualified statutory agent. Consider the following questions in selecting your statutory agent:

  • Is your statutory agent available to accept service during regular office hours?
  • If your statutory agent is unavailable, is another knowledgeable person available to accept service?
  • Does your statutory agent know what to do with any legal documents served on your company?
  • How quickly will your statutory agent deliver the documents to your legal counsel?
  • Does your statutory agent have a docketing system in place to ensure that you meet all important deadlines?

Selecting a statutory agent may seem like a small thing, but the wrong statutory agent can be fatal to your company. Select an appropriate statutory agent, and your business will boom.

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